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Iwncomm v. Sony: first SEP-based injunction granted in China

10 April 2017

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The Beijing IP Court recently handed down a landmark decision concerning infringement of a standard essential patent (SEP) in the Iwncomm v. Sony case. The court found that Sony had infringed a SEP relating to a national standard. The court ordered a permanent injunction, along with damages of close to RMB 9 million for past infringement. This is believed to be the first SEP-based injunction granted in China. The Sony case is also the first major court decision in the telecom space since Huawei v. InterDigital.

Background

WAPI (WLAN Authentication & Privacy Infrastructure) is a Chinese national standard for wireless connectivity. Similar to the TD-SCDMA standard, WAPI is a domestic standard promoted by the Chinese government. The WAPI standard was promulgated in 2003 and the Ministry of Industry and Information Technology (MIIT) approved WAPI’s use in mobile phones in 2009.

The SEP holder, Iwncomm, contributed to the standardisation of WAPI. Iwncomm also made a declaration with the National Information Technology Standardization Committee in 2003 that the standard it contributed to might incorporate its patents and that it will license such patents to any implementers on fair, reasonable and non-discriminatory (FRAND) terms. The declaration however did not specify the patent numbers for the implicated SEPs. Sony admitted during the trial that the WAPI standard is a mandatory standard in China to the extent that handsets will not be approved by MIIT unless they pass the WAPI testing.

Iwncomm and Sony had licensing discussions over the course of six years. In July 2015, Iwncomm filed the suit against Sony before the Beijing IP Court, asserting Chinese Patent No. ZL 02139508.X, entitled “Method for the access of the mobile terminal to the WLAN and for the data communication via the wireless link security”. The products under investigation are 35 WAPI-compliant models manufactured and sold by Sony.

Sony then brought invalidation proceedings against Iwncomm before the Patent Re-examination Board (PRB) of the State Intellectual Property Office. The PRB upheld the validity of the patent in a decision dated 17 February 2016.

SEP infringement

The parties did not dispute the importance of the patent-in-suit. The main infringement issues before the court were whether Sony’s activities infringed the patent and whether defences such as patent exhaustion are applicable in this case.

Sony committed both direct and contributory infringement

The court held that Sony had committed an infringement based on two arguments advanced by Iwncomm. The first was that Sony had committed direct infringement by conducting the exit-factory testing for its handsets. The second argument was that Sony had committed contributory infringement by facilitating the use of the standard by end users of Sony’s handsets. End users themselves are not liable for infringement because their use is deemed non-commercial under the Patent Law. The court found that contributory infringement is not predicated on the finding of direct infringement. Further, because the WAPI functional module of a handset does not have any substantial non-infringing use, the products under investigation are designed to carry out the patented functionality. As a result, Sony’s conscious provision of such products to end users gave rise to contributory liability.

Patent exhaustion does not apply to using a patented method

Sony relied on the defence of patent exhaustion, stating that it purchased the chipsets which achieve the WAPI functionality from Qualcomm and Broadcom and that Iwncomm has granted licenses to both chipset providers. The court held that for method claims, in accordance with the express wording of Article 69(1) of the Patent Law, patent exhaustion only applies to a product “directly obtained using the patented method”. The act of using a patented method, such as the infringing act at issue, is not covered by the patent exhaustion defence.

The court did not set out the terms of the licenses in detail, so it is not possible to know what exactly had been licensed.

FRAND is not a defence to infringement of a mandatory national standard

Sony further argued that because the patent-in-suit has been incorporated into a mandatory national standard and because Iwncomm had made a FRAND commitment, Sony should not be liable for patent infringement. This argument was dismissed by the court. According to the court, “the FRAND commitment is merely a commitment made by a patentee” to license on FRAND terms. The court stated clearly that FRAND commitment “does not say that a license is granted” and found that “it is not possible to conclude that a patent license is concluded simply based on the FRAND declaration”.

SEP-based injunction

The Beijing IP Court took the opportunity to set forth its views on the availability of injunctions in relation to SEPs.1

As a threshold matter, the court noted that when relying on a SEP holder’s FRAND commitment, an implementer has “a rational basis” to use the SEPs as the prospective licensee of a FRAND license. Yet “such rational basis lies in the good-faith negotiation” between the SEP holder and the implementer. The court went on to state that:

“If the parties fail to reach an agreement, in deciding whether the implementer’s use of the SEPs overrides the patentee’s rights to seek injunctive relief, [the court] should consider the parties’ fault, if any, during their negotiation. Specifically, an injunction request should be denied where no parties are at fault, or where the patentee is at fault, but not the implementer. Otherwise it might lead to abuse of the SEP rights and would be detrimental to the promotion and implementation of SEPs. The court should grant an injunction where the implementer is at fault, but not the patentee. Failure to do so would cause ‘reverse holdup’ against the SEP holder and compromise the protection afforded to SEPs. Where both parties are at fault, whether an injunction should be granted depends on which party bears more fault.”

Applying the above analytical framework, the court detailed the negotiation history between the parties from March 2009 to March 2015. The deadlock arises from the fact that Sony insisted Iwncomm furnish a non-confidential claim chart to allow it to assess the assertion. Iwncomm, on the other hand, refused to do so without an NDA in place.

The court found Iwncomm’s position to be reasonable. According to the court, given that the patent is essential to an apparent mandatory standard, an implementer such as Sony should be able to ascertain infringement without the claim chart from the SEP holder. Consequently, the court found that Sony employed delaying tactics and was at fault. As a result, the court ordered a permanent injunction against Sony.

Calculation of damages for past infringement

In China, a patentee may elect one of the following bases for damages calculation: (i) the patentee’s actual losses, (ii) the infringer’s illegal gains, (iii) a multiple of the reasonable royalty, and (iv) statutory damages. Filing four of its prior license agreements as evidence, Iwncomm pleaded that its royalty rate is RMB 1 per unit and that the reasonable royalties should be multiplied by three, the highest multiplier under the Supreme Court’s 2001 Patent Trial Guidelines.

The court fully adopted Iwncomm’s damages theory, citing the fact that the invention is a basic invention in the WLAN security field and that Sony was at fault during the negotiation. The court did not analyse in detail whether the licenses in evidence are comparable, merely noting that the territorial scope and duration of these licenses suggest that they can be referred to. Further, despite the fact that Iwncomm’s four licenses are all licenses for a portfolio of patents, the court held that the rate of RMB 1 per unit would be applicable for a single WAPI patent at issue. Based on the unit data from the MIIT for the period between 1 January 2010 and 31 December 2014, the court decided on a licensing fee of RMB 2,876,391 (2,876,391 units * RMB 1 per unit) and awarded damages of RMB 8,629,173 (RMB 2,876,391 * 3).

It is worth noting that the court also ordered expenses of RMB 474,194, including attorneys’ fees of RMB 400,000 (approximately EUR 54,000). This follows a recent trend of the IP courts in China to order substantial sums for attorneys’ fees.

Comments

The Sony case essentially utilised a quasi willing licensee/willing licensor framework to assess whether a SEP-based injunction should be granted. By seeking to strike a balance between an implementer’s access to standardised technology and a patentee’s entitlement to injunctive relief, the Beijing IP Court recognised that FRAND is a two-way street. This is consistent with the position that has been taken by the Chinese courts and agencies. See our previous article here. In particular, Article 24 of the Supreme Court’s 2016 Judicial Interpretation leaves the door open to injunctive relief in SEP litigation. And the Sony court now affirmed that a permanent injunction is available against an unwilling licensee.

The damages ruling of the Sony case also seems novel, as reasonable royalty is a damages base that has been rarely chosen in patent infringement cases in China. Setting aside the comparable license and FRAND rate issues, it may be debatable as to whether the court should triple the damages for past SEP infringement.

1. Article 24 of the Supreme Court’s 2016 Judicial Interpretation deals with FRAND licensing. The Sony court did not consider Article 24 because the acts of infringement in this case were alleged to have occurred in 2015 and because the judicial interpretation does not apply to compulsory national standards. Article 24 provides, in relevant part, that: “With regard to an essential patent for a non-compulsory national, industry or local standard which expressly incorporates the patent, the people’s court will generally deny an injunction request (based on such patent) where (i) the patentee intentionally violated the FRAND obligations when negotiating with the accused infringer for licensing terms such that no agreement is reached; and (ii) the accused infringer is patently not at fault during the negotiations.”